Considering the Cost of Lower Taxes

American tax policy must stand as one of the great mysteries of the global political economy.

In 1969 Neil Armstrong walked on the moon, Jimi Hendrix played “The Star-Spangled Banner” at Woodstock, and federal, state and local governments in the United States raised about the same in taxes, as a share of the economy, as the government of the average industrialized country: 26.6 percent of gross domestic product, against 27 percent among the nations in the Organization for Economic Cooperation and Development.

Nearly 50 years later, the tax picture has changed little in the United States. By 2015, the last year for which the O.E.C.D. has comparable data, the figure was 26.4 percent of G.D.P. But across the market democracies of the O.E.C.D., the share had climbed by an average of more than seven percentage points.

Citizens of many countries that were poorer and little taxed in the 1960s, like Spain and Japan, today pay a much larger share of their incomes in taxes than their American counterparts. In some rich countries like Denmark, where taxes were already high in the 1960s, taxpayers now contribute almost 20 percentage points of G.D.P. more to the public purse than Americans do.

Wagner’s Law, named for the 19th-century German economist Adolph Wagner, states that government spending as a share of the economy will increase as nations get richer and their citizens demand more and better public services. This may approximate public policy in other industrialized nations. In the United States, it fails.

Americans are paying dearly as a result, as their comparatively small government has proved incapable of providing an adequate safety net to protect those most vulnerable to globalization and technological change.

It is hard to understand the deep reasons behind the American aversion to taxes and government. Is it the vestigial expression of a rugged individualism born on the American frontier? Is it racial hostility — an unwillingness by whites to fund social programs that some believe unduly benefit minorities?

And whatever apologists for small government might argue, there is no credible evidence that countries with higher tax rates grow less.

Over the last couple of weeks, Republicans have offered legislation to cut taxes by $1.5 trillion over the next decade — more than half a percentage point of G.D.P. They assert a dire need to stimulate growth by encouraging corporations to invest in the United States.

But Lawrence H. Summers, a former economic adviser to President Barack Obama, has asserted that the plan may instead “retard growth” and burden the middle class. Bruce Bartlett, who helped conceive the 1986 tax overhaul under President Ronald Reagan but has become a critic of Republicans, characterized claims that corporate tax cuts would increase the income of the middle class as “complete nonsense.”

Beyond this criticism, though, the debate offers an opportunity to look closely at the mechanics — and consider the motivations — behind the nation’s great divergence with the other market democracies of the West.

Austria, Belgium, Greece, Hungary, Luxembourg, the Netherlands and Norway approved or carried out comprehensive tax reforms last year, according to the O.E.C.D. Other countries also enacted more piecemeal changes. With the exception of Greece, which is under German pressure to cut its budget deficit, they have all aimed at stimulating growth.

Many of these efforts are likely to reduce income-tax revenue, as the Republicans’ plans would. But the larger goals are radically different; they are also meant to enhance equity.

Of 15 O.E.C.D. countries that changed their top income-tax rates for 2016 and later years, nine increased them and only six reduced them, the O.E.C.D. found. Most of the tax cuts were aimed at those below the top tier of earners: over all, 19 countries cut marginal income-tax rates for those not in the highest bracket, aiming to increase the take-home pay of average workers.

Belgium eliminated its 30 percent tax bracket, the second highest, and raised the income threshold of the lowest bracket of 25 percent. In Austria, rates were reduced for all but top earners, whose marginal rate rose to 55 percent, from 50 percent. Canada and Luxembourg also aimed tax-rate cuts at middle-income earners.

At the bottom of the income distribution, Belgium, Britain, Germany, Norway and the Netherlands all increased the ranks of those owing no tax. Austria also expanded its tax credits, while Finland and the Netherlands increased the top payout of the earned-income tax credit, and Ireland introduced such a credit for the low-income self-employed.

To be sure, many tax changes in other rich countries benefit the rich. Inheritance taxes have declined in several other O.E.C.D. nations. The Republican proposition to cut corporate tax rates is hardly out of line: Most other advanced nations are doing the same thing.

Still, reforms around the O.E.C.D. do not look quite like the American giveaways. For instance, countries that have cut corporate tax rates have also raised taxes on dividends — shifting the tax burden from corporations to their shareholders, and collecting the tax revenue somewhere.

I have written about this country’s uniquely stingy tax policy before. Small government, I believe, has proved to be no match for its social ills, too puny to offer much resistance to rampant inequality, stubborn infant mortality or off-the-charts opioid addiction. American voters’ uniquely intense hostility toward trade can, in the same way, be traced back to the government’s ineffectiveness in mitigating trade’s disruptions.

Republicans seem to believe that the best prescription to address the nation’s ills is to slash some $50,000 from the taxes of people earning a million or more. As Isabel V. Sawhill and Eleanor Krause of the Brookings Institution note, the estate tax could generate $1 trillion over a decade just by raising the rate and cutting the exemptions to where they were in the 1970s. Raising the exemption on the estate tax to $11 million, as Republicans propose, will help only a narrow sliver of ultrarich Americans.

It is hard to conclude that the Republican proposal is about anything but that narrow sliver. If it succeeds, it will transform the United States from a low-tax country to a lower-tax one. And the mystery will persist: In cutting taxes as babies die and adults waste away in addiction, what do Americans mean by nation?